PensionsMay 22 2019

Managing doctors' annual allowance

  • Describe how the tapered annual allowance works
  • List the effects on doctors
  • Describe how doctors can mitigate the tax charge
  • Describe how the tapered annual allowance works
  • List the effects on doctors
  • Describe how doctors can mitigate the tax charge
pfs-logo
cisi-logo
CPD
Approx.30min
pfs-logo
cisi-logo
CPD
Approx.30min
twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
pfs-logo
cisi-logo
CPD
Approx.30min
Managing doctors' annual allowance

The value placed on this type pension scheme is extremely high. The high value of the pension and salary together means doctors get caught more often as a demographic than any other working group. 

This is also compounded by the inflexibility of the NHS scheme and DB schemes in general. 

Unlike a member of a workplace money purchase scheme, doctors who are members of the NHS scheme cannot lower their pension contributions to manage the annual allowance.

For example, if you have an annual allowance of £10,000, to avoid a charge you want to ensure your pension savings do not exceed this figure and this can be easily managed in a money purchase scheme where you can reduce your contributions. 

However, in the NHS scheme the pension benefit is linked to your salary, so it does not work in the same way. The reactions of doctors tend to be the extreme of either remain in the scheme, and find a way to pay the charge, or leave.

An option discussed on some forums is to opt-out of the scheme and then opt back in to manage the pension growth and thereby limit the annual allowance issue. 

However, it is difficult to manage without expert advice and may not be an appropriate solution as it could result in the loss of valuable death and ill-health benefits.

How does the tapering work?

As you would expect, it is not easy to explain how this all works. Put simply, anyone with an income over £150,000 will have their annual allowance reduced by £1 for every £2 of income over £150,000.

The maximum reduction is £30,000, reached by individuals earning £210,000 or over, resulting in an annual allowance of £10,000.

Now the complex bit. There are two definitions of income for tapered annual allowance purposes: ‘threshold income’ and ‘adjusted income’. 

Simply put, threshold income is your gross income minus any tax relievable contributions such as pension contributions (employer contributions do not count).

For example, if Anna has a salary of £120,000 and her NHS employee contributions are £17,400 (£120,000 times 14.5 per cent) – assuming she has no other tax relievable payments – her threshold income is £102,600 (£120,000 minus £17,400).

If your client’s threshold income is below £110,000 the tapering will not apply regardless of their final income or pension savings.

Remember that this is not just NHS earnings, but any income you receive from whatever source – rent on a buy-to-let property, dividends from investments, income from private work and so on. 

Adjusted income is effectively threshold income plus the value of pension savings. 

PAGE 2 OF 4